Observations and Insight

Ivers Riley: A Man for All Markets
Jim Kharouf – JLN

There are pioneers, innovators and leaders in every industry. Ivers Riley is one of the rare individuals to wear all three titles.

Riley, who died yesterday at the age of 82, is one of those executives who was part of several transformational events in the financial markets’ history, including: the early stages of the options industry; the creation of exchange traded funds, one of the most successful products in the history of financial markets; two critical periods at the Hong Kong exchanges; and a key player at the International Securities Exchange, which ushered in fully-electronic options markets.

Riley’s career was rare in the sense that he worked at several exchanges and across three asset classes: stocks, options and futures. He is first noted for his work in the mid-1970s at the Chicago Board Options Exchange, for his efforts in promoting and educating regulators and the industry on put options. Riley’s work earned him the nickname “Mr. Puts” for his relentless efforts on behalf of the contract.

While the CBOE was established in April 1973 and was growing, it wasn’t until the introduction of puts just over three years later that volumes at the exchange exploded. With puts established at the CBOE, the exchange posted record daily volumes in 1978 and soon afterward topped average daily volumes of 500,000 contracts per day.

“When I think of Ivers, I think of a person who took a backwater product, one that was listed and only traded calls initially,” said Gary Katz, CEO of the International Securities Exchange and a long-time colleague of his at the ISE. “And he convinced the regulator that puts were not boogeymen, that they were not to be afraid of, they were necessary for a portfolio. That, at the most basic level, was the building block of what would ultimately become the listed options market. Can you imagine what the market might look like today if we only traded calls?”

Read the rest of the article, including Riley’s innovative work on ETFs, his stint in Hong Kong, and his push toward electronic markets, on JohnLothianNews.com: http://jlne.ws/1vFvyZD

Lead Story

Stocks Synced With Dollar Most Since 2008 on Fed Bets: Options
Joseph Ciolli – Bloomberg
U.S. stock and currency investors are more in sync than at any point in the six-year bull market.
The Standard & Poor’s 500 Index is trading in the closest lockstep since 2008 versus an exchange-traded fund that rises as the U.S. dollar gains. ETFs tracking the benchmark equity gauge and the greenback were inversely correlated for the first five years of the bull market, only turning positive last year after the Federal Reserve started scaling back its stimulus program.
***DA: What does this tell you?

JPMorgan tops list of risky banks -U.S. government study
Douwe Miedema – Reuters
JPMorgan Chase & Co bears the highest potential hazard to the financial system if it were to fail, a staff study released by a U.S. government research agency showed, providing a first-of-its-kind numerical risk ranking of U.S. banks.
The bank had a “systemic risk score” of 5.05 percent for 2013 in a group of 33 large U.S. bank holding companies, the study by staffers at the Treasury Department’s Office of Financial Research (OFR) said.
***JB: Systemic risk to the financial system translates into the government will save them which means there is no risk.  Bonuses all around!

Volatility Has Natural-Gas Traders Scrambling
Timothy Puko – WSJ
The natural-gas market is costing Todd Gross a lot of sleep.
Mr. Gross, chief investment officer at Qeri LLC, a small commodity hedge fund in New York, used to wake up at 5 a.m. to look at the latest market data. Now he increasingly rises in the middle of the night to check the latest weather models and adjust his wagers.
He doesn’t want to miss what he calls an “oh my God” move of 5% or more. Mr. Gross, 48 years old, says it has become common for those moves to start as early as midnight when electronic-trading programs react to weather updates hours before most human traders are awake.
***DA: Todd Gross should move to Geneva, a large commodity center that is six hours ahead of New York.

What’s Behind the Mixed Signals from VIX Speculators?
Adam Warner – Schaeffer’s Investment Research
Hedge funds are net long CBOE Volatility Index (VIX) via futures, but VIX call open interest has dried up.

Treasurers urged to hedge FX risks amid volatility uptick
Paul Golden – Euromoney Magazine
In a client report issued earlier this month, David Woo, head of global rates and currencies research at Bank of America Merrill Lynch, referred to a growing consensus in the market that an unspoken currency war has broken out, which would make it more expensive for companies to take out insurance against currency flows.
According to Woo and fellow Bank of America Merrill Lynch strategist Vadim Iaralov, FX volatility is at its highest non-crisis level for 20 years.
***DA: At what level of volatility does it go from non-crisis level to crisis level?

Thomson Reuters FX Volumes Highest Since September 2014
Victor Golovtchenko – Reuters
Thomson Reuters Matching and FXall spot volumes have remained flat year-on-year, but rose swiftly when compared to the previous month, as overall volumes came in at the highest levels since September 2014.

Smaller brokers quitting US market en masse
Cian Burke – Futures & Options World
Competition between US brokers continued to tail off in the latter part of last year  as more futures commission merchants (FCMs) exited the market, according to a study by the Tabb Group.
The US-based research firm said in its fourth quarter trading report that some 15 FCMs quit the market in the three months to the end of last year.
***DA: It’s a jungle out there.


BATS moves toward another try at IPO
Bradley Hope and Telis Demos – Morningstar
BATS Global Markets Inc., one of the country’s three big stock-exchange operators, is preparing to replace its chief executive officer as it lays the groundwork to take another stab at an IPO, according to people familiar with the matter.
Chris Concannon, a former executive at the high-speed trading firm Virtu Financial LLC who joined BATS as president in December, is expected to be appointed as CEO as early as this summer, the people said. Longtime incumbent CEO Joseph Ratterman would become chairman of the company’s board of directors, they said.
***DA: Let’s try this again, shall we?

ISE Holdings Statement on the Passing of Ivers W. Riley
Press Release – International Securities Exchange, LLC
The International Securities Exchange Holdings, Inc. (ISE Holdings) today released a statement on the passing of Ivers W. Riley, who joined ISE’s Board of Directors in 2000 and served as its Chairman from 2002 to 2006.

Regulation and Enforcement

SEC Battle Over Waivers Deepens, Threatens to Stall Settlements
Dave Michaels – Bloomberg via The Washington Post
U.S. Securities and Exchange Commission member Daniel Gallagher vowed to oppose future settlements over Wall Street misconduct in cases where the agency hasn’t clarified whether the firm will face knock-on sanctions from the agreement.
***DA: Now that the horses are all out, time to close the barn door.

What’s Causing the Delays in New OTC Derivatives Rules?
Gregg Wirth – Traders Magazine
The 18-month-long stalemate between regulators in the US and the European Union (EU) continues to hobble clearing operations in the over-the-counter (OTC) derivatives market, raising costs and risk for buyside firms and increasing concentration levels among remaining central counterparties (CCPs).
Traders spoke with Virginie O’Shea, senior analyst at Aite Group, and asked her what the dangers were and when—or if—the market can expect a resolution.
***DA: Each side says “We want one set of rules that all sides can agree on. My rules.”


Baidu, Alibaba: Trading Strategy as Stocks Pause
Steven M. Sears – Barron’s
At a time when the market is skeptical of Alibaba Holdings’ and Baidu’s ability to fully monetize smart-phone advertising and online-shopping trends, investors can pursue bullish strategies in the options market.
By selling calls that expire within three months against Alibaba (ticker: BABA) and Baidu ( BIDU ), investors can hedge their stocks and still profit from advances.

Anticipating MSCI EAFE Index Option Price Behavior
Russell Rhoads – CBOE Options Hub
Over the next few weeks there is going to be a lot going on at CBOE. The Options Institute will be turning 30 soon, VIX and SPX option hours are going to be expanded to a 2:00 am Chicago opening, and the always informative US version of the CBOE Risk Management Conference will be held in early March. However, what is on the horizon that has me the most excited is the launch of index option trading on two of the widely followed MSCI family of indexes.

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